Retail and institutional investors can speculate on the underlying market prices of a wide range of financial assets is there is a contract for difference (CFD). CFDs are called derivative products and rely on leverage to enable the trader, who is never the owner of the underlying asset, to speculate on price movements without needing to put up the full value of the security being traded.
CFDs allow trading on currencies (forex), stock market indices, shares, commodities, interest rates, and bonds.
A CFD, in its essence, is an agreement to exchange the difference between the opening and closing price of the security being traded as the difference multiplied by the position constitutes the profit/loss.
CFDs v Spread betting: What’s the difference?
CFD traders can potentially profit whatever direction the market takes just like spread betting, as it is possible to open short and long positions on a contract. It is also free from Stamp Duty in the UK, although Capital Gains Tax is payable on any profits*. The advantage of this is that CFD trading can be used to hedge a share portfolio, allowing the trader offset losses against their tax liabilities.
Although the experience is almost identical for the trader, the trades are handled slightly differently. In spread betting the contract is determined by the amount of money the trader is prepared to stake per point, while the CFD trading involves buying or selling contracts that represent a certain amount per point in the market.
There are no commissions for spread betting. For most of the CFDs as well. However, for CFDs there are usually commissions for trading on certain equities.
Current CFD equity commissions at ETX:
·CFD US Equities – 1.5 cents per share
·CFD Euro Equities: 0.1% of the Notional Value (exposure on the trade)
*Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
Advantages of CFDs
- No stamp duty
- Long or short - trade in either direction
- Ability to hedge share portfolio
- Tight spreads starting at 1pt on indices and from 0.6 pips on forex pairs
- Trade online and via our mobile app